Stock buybacks defined the post-GFC money-printing era. Guess what. They’re back.
So stock buybacks are back.
Did you miss them?
To me, stock buybacks are one of the key leading indicators of an EZ Money boom.
Remember what happens. Companies end up with a stack of cash on their books (because, you know, for example, the government is printing billions of dollars every week). They take that excess cash and buy back their own stock.
In this way they “return capital to shareholders”. They buy back the shares. That decreases the supply of shares on the market. That bids up the price of the remaining shares.
Only, it’s seen in some circles as a little bid dodgy. Totally legal, but a tad dodgy.
Because remember that since the 80s we’ve started incentivising CEOs with company stock. That creates some funny incentives.
Imagine you owned millions of dollars of stock in a company. Imagine if you could increase the value of that stock by instructing the company to buy back that stock (off yourself, and others). Imagine you had the power to do that because you were literally the CEO.
You see the problem.
Not only that, many CEOs are have incentives based on EPS – Earnings per Share. That’s a pretty common measure of how a company is tracking.
But it’s a ratio. So it’s entirely possible that earnings could be falling, but if the number of shares is falling more (through buy backs), EPS could be rising.
The CEO could be rewarded for being at the helm of a company that’s going backwards.
After the GFC and the money printing that followed, companies ended up with a lot of cash in the bank, and stock buybacks became rife.
This caught the eye of the SEC. In 2018 SEC Commissioner Robert Jackson Jr. instructed his staff to “take a look at how buybacks affect how much skin executives keep in the game.” This analysis revealed that in the eight days following a buyback announcement, executives on average sold five times as much stock as they had on an ordinary day. “Thus,” Jackson said, “executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement.”
What’s more, a study by the research firm Fortuna Advisors found that, five years out, the stocks of companies that engaged in heavy buybacks performed worse for shareholders than the stocks of companies that didn’t.
And that kind of makes sense right? A buyback is a public statement that the company has nothing worth investing in. The best thing they can do with the money is give it away.
But here we are again. The money printers are on full-bore, not just in America but around the world. This meant that for my mind, more buybacks were inevitable.
And last week, ANZ showed us the way, with an announcement that they were going to buy back $1.5bn worth of their own shares:
Australia’s big four banks are estimated to be holding around $34 billion in surplus capital, with ANZ holding around $7 billion over and above a common equity tier 1 (CET1) ratio of 10.75 per cent.
ANZ chief executive officer Shayne Elliott referred to the bank’s capital position as “an embarrassment of riches” at the bank’s first-half result in May where it announced a 126 per cent rise in profit to $2.9 billion and 180 per cent increase in the first-half dividend to 70¢.
After taking into consideration the ongoing pressures in some parts of the economy due to COVID, including the current lockdowns in parts of the country, the strength of our balance sheet and ongoing financial performance means we are in a position to return a modest amount of surplus capital to shareholders through a buyback of shares on-market,” Mr Elliott said in a statement.
There was a modest pop in share price from $27.15 on Monday to $28.00 on Thursday – up about 3%.
My guess is that this is the start of a potential flood. CBA will probably follow next.
And look, while the incentives are a little wobbly, this might just be the best thing ANZ can do with the money. They can’t buy another bank. They’re not in a growth industry. Banking is as old as the hills.
What are you going to do with all that money?
It’s a nice problem to have.
But in the next 12-18 months, as all that free money filters through the system, it’s a problem that we’re all going to have.